Banks See Midterm Elections as Regulatory Opportunity

The fight over financial reform is far from over, and commercial banks have devoted $11.4 million in campaign dollars to improve their odds for the second round.

After a tense partisan battle in which several prominent Democrats came out against the banking industry, the majority of its campaign spending so far has supported Republican candidates.

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21. Much of the remaining tussle will be between banks and their regulators, who will be writing up specific rules and implementing them within the broader legislative framework.

Still, the banking industry is also pressing for certain legislative "corrections" that would lessen the cost of harsh reform measures. Peter Garuccio, a spokesman for the American Bankers Association, predicts there will be a lot of issues on the table stemming from Dodd-Frank.

"It's a massive, massive piece of legislation," says Garuccio. "It's safe to say that there will be some legislative items that seek to address shortfalls or deficiencies — things that you don't really know about until the rule-writing process gets going. I think we'll see a lot of that."

The ABA has been the top contributor within the commercial-banking sector this election season, pledging $2.1 million in campaign funds and spending $13.6 million on lobbying from 2009 to 2010, according to the Center For Responsive Politics.

The biggest contributions from individual banks have come, perhaps unsurprisingly, from the biggest individual banks:

JPMorgan Chase at $981,188;

Bank of America at $897,995;

Citigroup at $848,944;

and Wells Fargo at $645,426.

JPMorgan is the only giant bank whose contributions — both through a political action committee (PAC) and by individuals — have skewed Democratic. Bank of America is the only one whose contributions have mainly come from its PAC.

Community bankers have also been contributing heavily to ensure their concerns are heard. Independent Community Bankers of America (ICBA), an industry trade group, has contributed $786,050 to campaigns during the 2009-2010 election season. It also spent $7.5 million on lobbying during that period of time.

"Dodd-Frank is not the end of history for financial services," says Steve Verdier, executive vice president of congressional relations for ICBA. "The financial services industry will be engaged as never before with the upcoming elections."

As a representative of thousands of small, community banks across the country, some of ICBA's legislative priorities differ from bigger groups offering bigger dollars: "Our bankers are going to get a lot more sympathetic hearing from a congressman from Iowa or Nebraska than one from New York City because we're got hundreds of banks in those rural districts," explains Verdier.

The industry has been more successful than its Wall Street counterparts in fighting back tough measures. Verdier points to provisions that specifically targeted "too big to fail" banks, as well as changes to the so-called Collins amendment that pertained to capital measures. Ultimately that legislation, proposed by Sen. Susan Collins (R-Maine) and backed by the Federal Deposit Insurance Corp., included less-harsh standards for small banks.

Yet some of the major priorities that Verdier ticked off — housing finance reform, tax issues and minimizing the regulatory cost burden — are shared by larger competitors as well.

Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) were the two giant elephants in the room standing behind Sen. Chris Dodd (D., Conn.) and Rep. Barney Frank (D., Mass.) when they succeeded in getting the bill through their respective houses of Congress. As it stands, the Obama administration appears ready to retain the government's large role in the housing market by providing a guarantee on traditional mortgages. But it's unclear how much banks will have to pay for the privilege, or how much they will share the cost of winding down Fannie and Freddie's existing obligations.

As the most costly bailout to date, with strong views on either end of the political spectrum, the battle over Fannie and Freddie is sure to be rough.

Also on the table are legacy rules that have been costly for the industry. For instance, ICBA would like to see the Securities and Exchange Commission change its registration requirement from entities with at least 500 shareholders to those with at least 2,000. That way, banks with a relatively small number of stakeholders won't have to bear the extra paperwork, processing and regulatory fees.

Though commercial banks have pledged a majority of funds to Republicans this cycle, it's been more difficult than past election seasons to figure out where money would best be spent.

For instance, by early fall 2008, it had become fairly obvious that Democrats would be taking over both houses of Congress and that Obama was sliding into home plate. Banks had been preparing talking points on financial reform even while President Bush was in office.

This time around, country's partisan divide — combined with Tea Party wildcards in various districts — has made it difficult for the industry to decide where to devote its dollars.

Popular political wisdom dictates that Democrats will lose some seats in Congress, mainly in the House of Representatives. Yet it's far from clear what Republicans' legislative agenda will be. They haven't outlined any a consistent message other than "no" to whatever Democrats have proposed.

Furthermore, Democrats will probably retain a majority position in the Senate, with a liberal as chairman of the board, so to speak, in the Oval Office for at least another two years. So, even if banks have an axe to grind with the way financial reform proceedings went down, it won't serve them well to make enemies of either leading party on Capitol Hill.

So far, commercial banks have pledged $6.2 million, or 56% of total funds, to Republicans. The top recipient, though, has been Sen. Kirsten Gillibrand (D., N.Y.), who received $222,400 from the industry for her upcoming election battle.

The second-leading beneficiary has been Sen. Richard Shelby (R., Ala.), a conservative legislator who's the top Republican on the Banking Committee and received $160,700. Dodd, the committee's chairman, is retiring this year. Whether or not Republicans gain a majority role in the Senate, Shelby can be an influential legislator in the banking industry's court.

Rep. Spencer Bachus (R., Ala.), the top GOP member of the House Financial Services Committee, also received a decent chunk of change from the commercial banking industry, of $64,000.

Other leading recipients of campaign donations from commercial banks include: Sen. Blanche Lincoln (D., Ark.), who sits on the agriculture committee and played a key role in forging derivatives legislation; Sen. Charles Schumer (D., N.Y.), who was once the poster boy legislator for Wall Street but fell silent during much of the finreg negotiations; Sen. David Vitter (R., La.), Rep. John Boehner (R., Ohio) and Jeb Hensarling (R., Texas), all conservative Republicans who have been outspoken critics of Wall Street bailouts, Fannie Mae and Freddie Mac; as well as Rep. Melissa Bean, (D. Ill.), who played a key role in easing the derivatives legislation and Rep. Mike Castle, (R. Del.), a senior member of the House Financial Services Committee.

Garuccio said it has been more difficult this season for the industry to come up with a specific legislative agenda to promote, without a clear view of how the election battles will shake out. Although the ABA has given the majority of its donations — $1.3 million, or 61% — to Republicans, Garuccio says its members don't adhere to a particular political stripe.

"We always have and always will give to members of both sides of the aisle that are willing to work with us," he says.

For smaller, community bankers, ICBA's Verdier says the financial reform bill has made some issues "artificially partisan." He encourages executives to engage their hometown legislators on issues that affect their particular banks — from SEC registration to tax issues and estate planning — regardless of political preference.

"As bankers, they really have a responsibility to the bank to be involved, regardless of whether the congressman is a Republican or a Democrat," says Verdier. "What they do in the privacy of the voting booth is their own business."

One might think those operating at the cortex of capitalism always skew Republican, but that hasn't always been the case.

One prominent example of a blue dog among the elephants has been Jamie Dimon, the CEO of JPMorgan Chase. He and his wife, Judith, have donated hundreds of thousands of personal dollars to Democrats and their causes over the years — including the maximum $50,000 donation to President Barack Obama's inaugural fund. Dimon was whispered to be a contender for Treasury Secretary if Tim Geithner stepped down as recently as last fall.

Yet, the tides appear to have turned.

Dimon was snubbed harshly by the administration after opposing certain provisions in the financial reform bill. Only two top banking executives weren't invited to the White House for the Dodd-Frank bill's signing ceremony in July: Dimon and Goldman Sachs (GS) CEO Lloyd Blankfein. According to Federal Election Commission filings, Dimon hasn't pledged any campaign funds so far this season.